Tokenized securities, they're already here
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Illustration: Gabriella Turrisi/Axios
Imagine Wall Street 2.0 — stocks and bonds, but made digital tokens. That's one version of the future, but a glimmer of it can already be seen now.
Zoom in: Circle, issuer of the second-largest stablecoin, usd coin, tapped the world's largest money manager late last year to manage the coin's reserves — cash and short-term government paper — backing it in a money market fund.
- That would make usd coin (USDC) a tokenized security — a token on-chain representing off-chain assets in the form of a money market fund.
Why it matters: The partnership between BlackRock could be the foundation upon which Wall Street 2.0 is built.
- After that, "one can easily imagine a world where one asks, 'why not a token for the S&P 500?'" Dave Nadig, a futurist at data analytics firm VettaFi, tells Axios.
- (Important distinction: As a tokenized security, this would not imply that stablecoins are securities, or that USDC is one.) Circle notes that USDC is regulated as a form of "stored value," or prepaid access, under state money transmission laws.
Of note: WisdomTree has blockchain-enabled funds — for secondary record keeping — cleared with the SEC, approaching from the other side of the chain as a traditional financial firm.
The big picture: "The jury is out on whether this is the right way to wedge crypto into the traditional financial ecosystem," though the effort to get "40-Act funds on-chain," — a shorthand term for U.S. registered investment funds — is real, Nadig says.
- BlackRock chief Larry Fink said during the New York Times DealBook Summit in December that the future is tokenized securities.
- Coinbase Global chief Brian Armstrong said during the company's earnings call that the crypto exchange would not be getting into traditional equities, but left the door open for tokenized stocks.
How it works: Roughly 80% of Circle's USDC reserves are held in the Circle Reserve Fund, a money market fund holding a mix of cash and short-term government debt, or T-bills.
- It's a $31.8 billion fund, exclusive to Circle. BlackRock manages it and gets paid a fee of 0.17%.
- Prior to the BlackRock deal, USDC reserves were held at Bank of New York Mellon. Today the money market fund holding the reserves is custodied there.
Between the lines: The counterparty risk has been changed from the bank to the U.S. government, says Joseph Mannon, chair of the Private Fund Formation group at law firm Vedder Price. Otherwise, little has changed for usd coin holders, he adds.
What we're watching: The change could mean access for Circle to the Federal Reserve, albeit indirectly, through the money market fund.
- The plan is for Circle Reserve Fund to get access to the Fed's Overnight Reverse Repo Facility (ON RRP), which would allow the fund to park cash and benefit from a floor under overnight interest rates, that would accrue to the fund.
- Counterparty eligibility requirements apply. And the 20% of USDC reserves held in cash would move there, if approved.
If not approved, Circle said it would keep its 20% of reserves held in cash with its banking partners, a spokesperson tells Axios.
- They include Bank of New York Mellon, Citizens Trust Bank, Customers Bank and Signature Bank and Silvergate Bank, according to a recent attestation report.
